Photo Credit: Daniele Dalledonne || Ever been to a place where everything was a little past its prime, but showed that it was a beautiful place in its time?
One of the great draws in reading investment writing is the lure of “hot tips.” Everyone wants an investment idea that they can put a lot of money into that will reward buyers (or shorts) with a quick and large score. Thus most publications try to lure you in with articles like these, whether they will work or not.
We live in an era where market players scour as much fresh data as possible to make money, because there is validity to the idea that only fresh, previously unknown information can produce excess returns. The grand majority of us will never receive that information for free, and can’t afford to pay up for services that promise to give such carefully researched ideas (whether true or not, and whether they work or not).
So what’s a humble value investor to do, professional or amateur? I can suggest five things:
Take a look at old ideas that seemed promising but when the news hit the market, there was a price jump, then a fall, then nothing. Typically, I have lists of companies that I have looked at — maybe it is time for a second look?
Source your own ideas — particularly look at smaller companies that have low or no analyst coverage. As regulations have come over Wall Street, you might be surprised at the number of companies in seemingly boring industries that have little to no real coverage. Some of them are sizable. (By “real coverage” I mean a human being, not an algorithm. Don’t get me wrong, algorithms are often better than people, but the value of a human being here is that he/she is more representative of how human investors think — and we love exciting stories.)
Scan 13Fs for new positions and additions — my favorite ideas are when a number of clever investors are adding on net to their holdings (and the stock has done nothing), or two hedge funds buy a new name at the same time that none of the other bright investors hold at all (not a spinoff).
Or, look at spinoffs. For a little while, there will be liquidity and small or no analyst coverage. Many large investors and indexers will toss out the smaller spinoff, often leaving a undervalued company behind.
Hold onto companies in your portfolio if they stumble, but you still think management is making the right decisions.
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